Understate the value of the derivative


A bank enters into a credit derivative where it agrees to pay $100 at the end of 1 year if a certain company's credit rating falls from A to Baa or lower during the year. The 1-year risk-free rate is 5%. Using Table 23.6 estimate a value for the derivative. What assumptions are you making? Do they tend to over state or understate the value of the derivative?

Request for Solution File

Ask an Expert for Answer!!
Finance Basics: Understate the value of the derivative
Reference No:- TGS041418

Expected delivery within 24 Hours